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Merkel and Sarkozy push for greater European co-operation

European summit calls for creation of eurozone president and balanced budgets

Angela Merkel and Nicolas Sarkozy last night urged closer economic co-ordination and called for a Europe-wide tax on financial transactions as Germany and France pledged to prevent a disintegration of the ailing single currency.

A summit meeting between the German chancellor and the French president in Paris backed plans for all 17 members of monetary union to write balanced budget clauses into their constitutions by next year. It also sought better governance of the single currency through the creation of a eurozone president.

But on the day official figures showed a marked slowdown in growth across the eurozone, analysts said there appeared to have been no discernible progress either on increasing the size of Europe’s bailout fund or on the floating of common Euro-wide bonds. Both are strongly opposed by German taxpayers, who fear they will have to pick up the bill for the problems in the weaker eurozone economies.

Merkel did not close the door on euro bonds but said they should be used only as a last resort. “The question is what is right now for overcoming the current phase of the crisis. Over and over again, I feel that people are looking for the one event, the one method which will solve everything and lift us out of the crisis, and in this context people often say that the last resort is euro bonds.

“I neither think that Europe is at the point of needing its last resort, nor do I think that we can solve these problems with what I have called a bang. And therefore I think that what we are proposing here is the means with which we can solve the crisis right now and win back trust, step by step… I do not think euro bonds will help us in this.”

Despite Merkel’s caution, Sarkozy hoped the eurozone’s two biggest countries would ensure the currency’s future. “We want to express our absolute will to defend the euro,” he said, and for Germany and France to have “a complete unity of views”. The French president said that the aim was to create a “real economic government for the eurozone”, made up of heads of state and government, which would meet at least twice a year. He also said that the group would elect a president for two and a half years, proposing Herman Van Rompuy, president of the European Commission, for the job.

Peter Buchanan, economist at CIBC in Toronto, said: “The market was obviously fixated on whether they would perhaps improbably agree to support the notion of euro bond issuance, where Germany and France would agree to underwrite and guarantee some of the debt issuance for some of the other members.

“Unless you get that, the general conclusion is that the crisis over there is not very much closer to a solution than it was a couple of weeks ago.”

Figures released showed that the eurozone grew by 0.2% in the second quarter of 2011, down on the 0.8% expansion of the first quarter. In Germany, Europe’s biggest economy, output was up by just 0.1%, compared with the 0.5% expected by the financial markets. Germany’s Federal Statistical Office also revised down growth in the first quarter of 2011, to 1.3% from its initial 1.5%.

With France’s economy failing to grow during the quarter, analysts said Germany’s GDP data showed that the eurozone economy had worsened as its debt crisis entered a new, dangerous phase. The German slowdown was blamed on a fall in domestic consumption and construction work. There was also a fall in energy production after the government shut down eight nuclear plants in the aftermath of the Fukushima reactor disaster in Japan.

Spanish GDP grew by 0.2% during the quarter, down from 0.3% in the first three months of 2011.

End of the Wirtschaftswunder?

Sony Kapoor, managing director of Re-Define, a Brussels-based economic thinktank, said: “The inability to sort the euro crisis is weighting down market confidence, driving excessive austerity and ultimately eating away at growth.

“The terrible growth figures will weigh heavily on the euro crisis. The euro area is caught in a self-inflicted low-growth, low-confidence trap.”

Carsten Brzeski, senior economist at ING, said: “Looking ahead, the million-dollar question is whether a solid second quarter is the beginning of the end of the German Wirtschaftswunder [economic miracle] and whether recent market turmoil could push the economy back into recession,” said Brzeski.

Latvia leads the way

Some European countries managed to grow significantly faster than the 0.2% average across the region: Belgium by 0.7%, Sweden by 1.0% and Finland by 1.2%. The most rapid growth was recorded by Latvia, with a 2.2% increase in GDP during the second quarter, followed by Estonia with 1.8%.

Portugal, like France, was flat – an improvement on two quarters of 0.6% negative growth. Data for some countries, including Ireland and Greece, was not released. © Guardian News & Media Limited 2011 | Use of this content is subject to our Terms & Conditions | More Feeds